We are downgrading Taiwan's 2016 real GDP forecast slightly to0.7% from 0.9% previously as continued export headwinds due to theslowdown in China and a host of other domestic factors continue toweigh. However, accommodative monetary policy will lend a degreeof support, limiting downside potential.Taiwan's rejection of the Permanent Court of Arbitration's July12 ruling on the Spratlys is a step back in the island's efforts toincrease engagement with the international community by abidingby international rules. The many similarities in Taiwan's South ChinaSea position and that of the mainland could also further complicatealready-challenging cross-Strait ties while potentially underminingTaiwan's Southbound policy as its refusal to comply with the rulingleads to strained relations with South East Asia.In line with our expectations, the CBC cut its discount rate by 12.5basis points (bps) to 1.375% during its monetary policy meeting onJune 30. Given the CBC statement, we now forecast an additionalinterest rate cut of 12.5bps, which will take the benchmark rate to1.25% by end-2016 as the central bank seeks to support growthand keep the Taiwan dollar competitive.Falling house prices in Taiwan's major cities are unlikely to lead to asignificant pick-up in housing market transactions as the economy'sslowing growth outlook and still-high house prices continue toweigh. With housing-related taxes accounting for a non-insignificantproportion of government revenue, we maintain our forecast forthe government's 2016 fiscal deficit to come in at 1.6% of GDP ashousing-related revenues fall short.We have upgraded our average 2016 TWD forecast slightly toTWD32.40/USD from TWD32.80/USD previously on the back ofattractive technicals and the increased likelihood of further US dollarweakness. Over the long term, we expect gradual strength as anundervalued real effective exchange rate, increasing reserves anda large current account surplus lend support to the TWD.

Taiwan Country Risk Report Q4 2016Executive Summary.. 5Core Views...5Major Forecast Changes.5Key Risks.5Chapter 1: Economic Outlook.. 7SWOT Analysis... 7BMI Economic Risk Index.. 7Economic Growth Outlook 8Downgrading Growth Amid Weak H116 Figures..8We are downgrading Taiwan's 2016 real GDP forecast slightly to 0.7% from 0.9% previously as continued export headwinds due to theslowdown in China and a host of other domestic factors continue to weigh. However, accommodative monetary policy will lend a degreeof support, limiting downside potential.GDP By Expenditure Outlook 9TABLE: GDP GROWTH FORECASTS..9TABLE: PRIVATE CONSUMPTION FORECASTS..10TABLE: GOVERNMENT CONSUMPTION FORECASTS...10TABLE: FIXED INVESTMENT FORECASTS..10TABLE: NET EXPORTS FORECASTS10Fiscal Policy And Public Debt Outlook.. 11Housing Market To Remain In The Doldrums.11Falling house prices in Taiwan's major cities are unlikely to lead to a significant pick-up in housing market transactions as the economy'sslowing growth outlook and still-high house prices continue to weigh. With housing-related taxes accounting for a not-insignificantproportion of government revenue, we maintain our forecast for the government's 2016 fiscal deficit to come in at 1.6% of GDP ashousing-related revenues fall short.Structural Fiscal Position 12TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.12TABLE: FISCAL AND PUBLIC DEBT FORECASTS...12Monetary Policy 13Further Easing On The Horizon...13In line with our expectations, the CBC cut its discount rate by 12.5bps to 1.375% during its monetary policy meeting on June 30. Giventhe CBC statement, we now forecast an additional interest rate cut of 12.5bps, which will take the benchmark rate to 1.25% by end-2016as the central bank seeks to support growth and keep the Taiwan dollar competitive.Monetary Policy Framework 14TABLE: MONETARY POLICY FORECASTS..14Currency Forecast 15TWD: Maintaining Gradual Appreciatory Bias15We have upgraded our average 2016 TWD forecast slightly to TWD32.40/USD from TWD32.80/USD previously on the back ofattractive technicals and the increased likelihood of further US dollar weakness. Over the long term, we expect gradual strength as anundervalued real effective exchange rate, increasing reserves and a large current account surplus lend support to the TWD.TABLE: BMI CURRENCY FORECAST15Outlook On External Position.. 16TABLE: MAIN IMPORTS AND EXPORTS...16TABLE: MAIN IMPORT AND EXPORT PARTNERS...16TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.17TABLE: CURRENT ACCOUNT BALANCE FORECASTS...17Chapter 2: 10-Year Forecast... 19The Taiwan Economy To 2025 19Multiple Headwinds Against Structural Growth.19A strong recovery from the global financial crisis by no means suggests that Taiwan's economy will maintain a robust growth trajectorygoing forward. We believe the lingering presence of the government within the banking sector, an increasingly uncompetitive techsector, an overly tech-focused economy and the reluctance to speed up Chinese investment will impede Taiwan's structural growthprospects. Moreover, a rigid labour market, coupled with fast deteriorating demographics will serve to erode the attractive of Taiwan'sbusiness environment. Lastly, we expect the structural shift in China's economy to carry wide-ranging ramifications for Taiwan. Weexpect real GDP growth to average 3.0% between 2016 and 2025.TABLE: LONG-TERM MACROECONOMIC FORECASTS.19Chapter 3: Political Outlook... 23SWOT Analysis. 23BMI Political Risk Index... 23Domestic Politics. 24South China Sea Ruling A Step Back For International Engagement..24Taiwan's rejection of the Permanent Court of Arbitration's July 12 ruling on the Spratlys is a step back in the island's efforts to increaseengagement with the international community by abiding by international rules. The many similarities in Taiwan's South China Seaposition and that of the mainland could also further complicate already-challenging cross-Strait ties, while potentially underminingTaiwan's Southbound policy as its refusal to comply with the ruling leads to strained relations with South East Asia.TABLE: POLITICAL OVERVIEW 24Long-Term Political Outlook... 26Legal Status Quo To Prevail Into The 2020s...26Taiwan's long-term political prospects are inseparable from its relations with China, and while cross-Strait relations have thawed inrecent years, we believe the status quo will largely prevail. While further economic integration is likely between the two Chinas, weexclude meaningful political convergence. Meanwhile, Taiwan is extremely unlikely to regain internationally recognised independence.As a result, we believe Taiwan will remain in a political no-man's land - with this being the least worst path for political stability.Chapter 4: Operational Risk... 29SWOT Analysis. 29Operational Risk Index 29Operational Risk... 30TABLE: OPERATIONAL RISK.30Market Size And Utilities Analysis.. 31TABLE: ASIA - MARKET SIZE AND UTILITIES RISK32Labour Costs 35TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE... 36Chapter 5: BMI Global Macro Outlook... 39Global Macro Outlook.. 39Brexit To Hit Global Growth.39TABLE: GLOBAL ASSUMPTIONS..39TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...41TABLE: MACROECONOMIC DATA and FORECASTS..43

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